Can big data make Groupon profitable?

Groupon’s prospectus for an IPO valuing it as high as $30 billion started arguments over the company’s huge losses, and right now it’s more or less still in the Yellow Pages business. But as I discuss in my Weekly Update at GigaOM Pro (subscription required), by better applying big data analysis, Groupon could start seeing profits.

The numbers are in

Groupon revenues grew from zero to $713 million in three years – and $645 million in 2011’s first quarter – but it lost $456 million last year and $147 million in the first quarter of 2011. Aside from international acquisitions, the big expenses driving those losses are staffing, especially in sales, and marketing spending. According to its S-1, Groupon has over 3,500 salespeople and over 900 editorial staff writing up its clever, quirky offer emails. It spent over $250 million on marketing in 2010 and a whopping $208 million in this year’s first quarter.

Looking at Groupon’s quarterly data, you see a flat to slightly down trend in deals sold and total revenues per subscriber. Meanwhile, marketing spending per new subscriber added is more than doubling. With competition increasing and the novelty of daily deals wearing off, customer acquisition costs will only go up.

So far, Groupon’s spending on growth hasn’t produced any economies of scale nor network effects. In other words, it has yet to show that taking on additional consumers or merchants adds more than proportional value to its network, or that it can lock in either type of customer.

What Groupon can do

So what can Groupon do in order to better attain customers and produce a profit? Here are a few thoughts:

Analyze its data to create more personalized offers. Offers that are more personalized and targeted to particular consumer interests should generate more purchases per customer. Groupon’s data analysis should lead to better marketing insights on customer habits and preferences that it could deliver as a service back to its merchants.

Add more services. Unlike Gilt Groupe, which is getting deeper into online retail (a business that scales less efficiently than technology-driven marketing), Groupon should add products for its merchants. Just like Yellow Pages companies like YP.com and Superpages, Groupon should buy search and display advertising for its merchants: The company is well equipped to do the targeting analysis that would baffle a local small business.

Create customer loyalty programs. Groupon should also help its merchants with their customer retention and loyalty programs with “brick and click” points and check-in programs. The company is testing mobile offers, but why not just buy Foursquare? Groupon could maintain the brand and probably triple Foursquare’s audience while adding its local sales force to Foursquare’s budding national advertiser business.

Groupon’s business is not for the faint of heart, and to read about potential competition in this space, please see my weekly update (subscription required).